4 Steps to Take When You Start Investing
However intimidating investing may seem, it’s actually quite accessible. While it does take some time to gain momentum, any novice can grow to be a pro with just a few key steps and strategies.
Read on for our four steps to start your investment journey on the right foot.
Step 1: Get Acquainted with the Lingo
Have you ever wondered, “what is stock?” and “who is Dow Jones?”
Then this is the article for you.
Before you even meet Mr. Jones, it’s about time you catch up on a few key investment terms (and also note, Dow Jones isn’t a person):
- Stock – A stock is a piece of the pie, so to speak. In other words, it represents a shareholder’s partial ownership of a given entity. You make money off these by eventually selling them at a higher price when that company succeeds, and demand for their stocks increase.
- Bonds – This is a type of low-risk, low-reward investment where you lend money to a government or other entity, which is then promised back to you after a certain time, plus interest.
- Mutual Funds – A collection of stocks or bonds put together by a dedicated portfolio manager, at the cost of a fee.
- Dividend – Dividends are the portions of a certain company’s income that is given to shareholders, proportional to their stock ownership.
- NASDAQ – Nasdaq is a New York City-based stock exchange for securities, as well as a stock index.
- The Dow Jones Industrial Average – The DJIA serves as another stock market index that compares stock performances of various large companies.
Step 2: Determine Your Risk Tolerance
Before you put any money into an investment, first ask yourself: “what is my risk tolerance?”
If you have a lot of disposable income that you don’t mind risking for potentially tremendous rewards, then you can afford to be an aggressive investor. If you’re more anxious about the whole process, start with a more conservative approach instead.
Here are some factors to consider when determining your risk tolerance:
- Your age and distance from retirement
- Future income needs like a big purchase or college tuition
- Financial goals
- Disposable income and debt
- Whether or not you have dependents that rely on you
- The time you have available to grow your investments
Step 3: Budget to Invest
This step is pretty simple: don’t invest any money you aren’t comfortable losing. While the stock market waters aren’t as treacherous as many people think, it still presents a fair share (no pun intended) of risk. Before you dip your toes into it, make sure you’re budgeting and saving each month so you can dedicate capital to your investments.
Just don’t forget to first allocate money for your basic needs.
Step 4: Choose Your Asset Allocation Strategy
Once you’ve allocated the amount of money you’re willing to invest per year or per month, you next have to determine exactly what investments you’ll devote it to. Will you spread it out between various stocks in the same sector? Will you invest in a variety of promising markets? Or will you put all your nest eggs in a single basket?
While one of these ideas might scream out as profoundly wrong or totally correct, there’s actually no right answer. Your asset allocation strategy is just that: yours.
Here are some common strategies that may align with your risk tolerance, income needs, and investing goals:
- Diversification – To diversify your portfolio is to mix up your investments across various asset types, markets, sectors, and companies. While you can choose exactly how you diversify, the basic principle still holds: the more you spread out your investments, the more you spread out (and therefore reduce) your risk.
- Growth Sectors and Market Timing – If you find yourself geeking out over tech blogs or business articles, maybe you’re ready to pursue a more attentive investment strategy. Investing in growth sectors is all about paying close attention to shifting markets, promising new developments, and growth potential in various industries. If you can predict growth in a certain company, then you just might hit a jackpot or two.
- Mutual Funds – This one’s pretty simple: just let a professional do it for you! While someone ultimately puts together and manages your portfolio, you can still do your own research on various mutual funds to ensure you know more or less what you’re walking into.
The beginning of one’s foray into investing usually straddles a line of overly ambitious risk-taking and futilely small investments. However, by familiarizing yourself with important investment terms and concepts—and getting acquainted with your personal investment style—you’ll be more than prepared to meet your goals and score some dividends.
No matter your end goals, be sure to approach this unpredictable world with patience, strategy, and an attentive mind.